21 November 1996 External T.I. 9632985 - SALARY DEFERRAL ARRANGEMENT

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

Principal Issues:

Whether hypothetical plan meets the requirements of Regulation 6801a?

Position: Routine positions

Reasons: Routine

								5-963298
XXXXXXXXXX							Franklyn S. Gillman

Attention: XXXXXXXXXX

November 21, 1996

Dear Sirs:

Re: Paragraph 6801(a) of the Income Tax Regulations (the "Regulations")

This is in reply to your letter dated October 2, 1996 wherein you requested clarification as to the application of paragraph 6801(a) of the Regulations.

The situation described in your letter appears to be an actual fact situation and as noted in Information Circular 70-6R2, we do not express opinions on proposed transactions other than as a reply to an advance income tax ruling request. Where a completed transaction is involved, the enquiry should be addressed to the relevant Tax Services Office. However, we are prepared to offer the following general comments.

It is the Department's position that as long as all the conditions contained in paragraph 6801(a) of the Regulations are satisfied at the time the arrangement under the deferred salary leave plan (the "DSLP") was initiated, an employee will not be subject to reassessment of prior years upon termination of the DSLP. It is our position that the DSLP should provide for the payment of the deferred amounts as soon as possible when it is known that the terms of the DSLP will not be complied with. For example, in section 4 of ATR-39, we considered a 60 day pay out period to be acceptable when the employee had to withdraw from the plan.

The DSLP should prohibit the employee from withdrawing from the plan at will, and the employer should ensure that the deferral period ends sufficiently in advance of any planned retirement by the employee. Otherwise, the plan might be utilized as an income-sheltering device where funds may be deposited free of tax and then withdrawn at any time and for any purpose.

Where the participant is unable to continue deferrals of salary on a temporary basis, such as when maternity leave is taken, but still wishes to take a leave of absence later, contribution to the DSLP may be suspended and the deferred amounts will remain in the plan. Given the time limits for the deferral period and the commencement of the leave of absence, any such suspension cannot result in either:

(i) the deferral period lasting longer than six years (including the period of suspension), or

(ii) the leave of absence starting later than immediately after the end of the deferral period.

In the event of death or termination of employment, the arrangement should provide that participation in the DSLP is terminated. Additionally, if the participant's circumstances change and continued participation in the DSLP would result in financial hardship, then the participant may withdraw from the DSLP with the permission of the employer. When this occurs, the deferred amounts must be paid out as soon as possible. A DSLP should not provide for withdrawal from the plan other than for specific reasons, such as, undue hardship to the participant or the financial difficulty of the participant.

DSLP's which provide for the payment of the deferred amounts as soon as possible after withdrawal are acceptable and meet the conditions of paragraph 6801(a) of the Regulations. Amounts are taxable as employment income in the year of receipt by the employee.

Subparagraph 6801(a)(i) of the Regulations provides that a leave of absence must commence immediately after the deferral period and that the deferral period must not exceed 6 years from the date on which the deferrals are commenced. A plan should clearly provide that, under no circumstances will a deferral period in excess of 6 years be allowed. Should any postponement cause the leave of absence to commence at a later time, the DSLP will no longer be a prescribed plan pursuant to paragraph 6801(a) of the Regulations.

The following comments reflects the Department's position concerning unemployment insurance premiums and Canada Pension Plan contributions with respect to a DSLP. You may wish to include some or all of the following comments in the documents creating the DSLP.

Unemployment Insurance

Unemployment insurance premiums are to be based on the employee's gross salary during the deferral period and no premiums are to be withheld from the deferred amounts when paid to the employee during the leave period.

Canada Pension Plan ("CPP")

CPP contributions are to be based on the employee's salary net of the deferred amounts during the period of deferral and on the deferred amounts when paid to the employee during the leave period. When the deferred amounts are paid to the employee by a trustee of the DSLP during the leave period, that trustee is deemed by the CPP Act to be an employer of the employee and is therefore required to pay the employer's CPP contribution in respect of that employee. Where the trustee/employer recovers the employer's CPP contribution from amounts otherwise payable to the employee, it is our view that this recovered amount will not be part of the employee's gross salary from that trustee/employer and therefore need not be included on the employee's T4 slip.

If further information is required concerning the trustee's responsibility with respect to CPP contributions or the preparation of T4s etc., the enquiry should be directed to Mr. Pierre M. Paquette at (613) 952-5422 or to the following address:

CPP/UI Eligibility and Systems Division
Assessment and Collections Branch
Revenue Canada Taxation
875 Heron Road
Ottawa, Ontario
K1A 0L8

These opinions are our best interpretation of the law as it applies generally. They may, however, not always be appropriate in the circumstances of a particular case. As stated in paragraph 21 of Information Circular 70-6R2 written opinions are not advance rulings and, accordingly, are not binding on the Department.

We trust these comments will be of assistance.

Yours truly,

for Director
Financial Industries Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch